Sublease
A sublease is a transaction in which an underlying asset is re-leased by a lessee (the intermediate lessor) to a third party, while the original lease (the head lease) between the head lessor and the intermediate lessor remains in effect.
Leasing
Explanation
The intermediate lessor accounts for two contracts: the head lease as lessee and the sublease as lessor. Classification of the sublease differs between the standards:
• ASC 842: the intermediate lessor classifies the sublease by reference to the underlying asset.
• IFRS 16: the intermediate lessor classifies the sublease by reference to the right-of-use asset arising from the head lease.
As a result, the same sublease can be an operating lease under ASC 842 and a finance lease under IFRS 16. If the sublease is a finance lease under IFRS 16, the intermediate lessor derecognizes the right-of-use asset and recognizes a net investment in the sublease, while the head lease liability remains.
Why It Matters
Subleases are common in real estate and in equipment businesses that refinance assets through head leases. Correct accounting requires a link between the lease-in and lease-out contracts – in SAP, for example, between SAP Contract and Lease Management (CLM) and SAP Revenue Accounting and Reporting (RAR).
Related Terms
Lessor / Lessee · Right-of-Use Asset · Net Investment in the Lease · ASC 842 · IFRS 16
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